The Lords last night backed the government and approved sexual equality regulations that will prevent church agencies discriminating against gay couples.
Peers approved the Equality Act (Sexual Orientation) regulations after a motion to defeat it was defeated by 168 votes to 122.
The new regulations will come into force on April 30th, prohibiting businesses and service providers discriminating against homosexual people.
Church groups had vehemently opposed the regulations and 42 lay members of the Church of England's general synod wrote to bishops in the Lords calling on them to block the regulations.
Speaking in prime minister's question time before last night's vote, Tony Blair argued parliament had a simple choice; it either voted to end discrimination against gay people or accepted it.
Introducing the regulations for the government, Baroness Andrews said the Act marked a historic step in the long journey towards dignity, respect and fairness for all.
She said: "No one will be denied the right to be themselves and to be treated fairly. And much of this debate centres on the right to dignity and equal treatment-the right not to be humiliated.
"It cannot be right, in the body of evidence that we have seen on discrimination against gay and lesbian people, that same-sex couples may be asked to leave a restaurant for holding hands, or that a school can turn a blind eye to homophobic bullying."
Lady O'Caithan led an amendment to reject the regulations, which she warned were "seriously flawed" and paved the way to litigation.
She argued: "The government is rushing headlong into the incredibly sensitive area of a clash between gay rights and religious freedom and doing so by secondary legislation that does not allow for amendments and permits only very limited debate.
"It is profoundly dangerous of the government to decide to use the law to force religious believers to change their beliefs."
Lady O'Caithain criticised the lack of parliamentary debate on the regulations, echoing claims from backbench Tory MPs.
However, Mr Blair maintained there had been a "full debate" on the regulations and correct procedure had been followed. The final regulations have struck the right, sensible balance, he added.
Catholic adoption agencies will now have a 21 month transition period before they are affected by the regulations. It is hoped that, if they carry out their threat to close, this will give them sufficient time to pass on their skills and expertise to secular agencies.
Communities secretary Ruth Kelly welcomed the peers' backing as a "major step forward in ensuring dignity, respect and fairness for all".